Tuesday, June 26, 2018

Is it still price competitive as in the old days? Yes and no. The price leaders continue to be Sprint and T-Mobile while AT&T and Verizon continue to position themselves as the premium carriers. Of course the big two's legacy network perception continues to play an integral role both in high-value customer retention and seemingly record low churn. Despite T-Mobile's continuous poaching, the sky hasn't fully fallen at AT&T and Verizon.

Make no mistake, T-Mobile was "the" catalyst that stimulated postpaid price wars and brought unlimited back at the big two. Network and price continues to drive service provider selection but with over 120% wireless penetration, the game for several years has been one of switching. Number 3 and 4 players, T-Mobile and Sprint have been marketing their networks to be equivalent to that of the bigger two. Combined with price advantage, T-Mobile has seen greater success in building up its subscriber base. However, the days of widespread price slashing at T-Mobile has stabilized. While Sprint continues its price value leadership to acquire new customers and offset churn, the three other providers are moving to maintain or increase profitability.

Now the shift is moving to embedded value, beyond pricing. At T-Mobile, higher data thresholds on data prioritization, hotspot capability, texting and data abroad, T-Mobile Tuesdays and free Netflix are just examples for retention and acquisition. To offset content, Sprint cut a deal with Hulu while AT&T rolled in HBO as a benefit of subscribing. Verizon content play is Go90 but it's not a subscriber benefit as Go90 is an open to all. However, AT&T's strategic vision is one that centers around content and the ability to deliver and monetize that. AT&T's acquisition of DirecTV produced the over the top (OTT) DirecTV Now. Now with quickly closing the Time-Warner acquisition, AT&T announced two new postpaid rate plans that bundle content value, anchored by WatchTV.

WatchTV is a 'skinny bundle' that features well known video channel brands. Customers on the new Unlimited &More and Unlimited &More Premium receive the base channels. Premium users will be able to add HBO, Cinemax, SHOWTIME or STARZ as well as music streaming services like Amazon Music Unlimited and Pandora Premium. For non-AT&T customers, the price is $15.

When DirecTV Now launched, many knocked the limited content available but as the progressed, more channels were added; it's likely to follow a similar playbook to further WatchTV's value proposition. WatchTV is based on the same DirecTV Now platform which may borrow key features including a similar navigation guide, multi-platform access and cloud DVR. This immediately conjures up the cannibalization issue of current DirecTV franchise of users. To offset this, a $15 credit is available to upsell or tamp down any video churn.The Rate Plan ComparisonSurprisingly, a new portfolio swap comes in just over three months since the last price change. Inevitably the conversation moves to price. This introduction is supposed to be on the week of June 24th yet as of this writing, the new plans have yet to be launched. With some preliminary details on the new Unlimited &More and Unlimited &More Premium plans, they seek relative parity with the previous Unlimited Choice and Unlimited Plus Enhanced. What has been shared so far is that Choice and &More is the same at 4 lines ($160) but $5 more with lines 1 to 4.

For Unlimited &More Premium, the pricing remains with Plus Enhanced with lines 1-4 ($190) but $5 more for lines 5+. To me, it's clear that AT&T covets the 4 line account as the 'bread and butter' profile of its users. Still, there has been no price cuts so T-Mobile and Sprint remain the price leaders while Verizon remains the most expensive, especially withe introduction of the third aboveunlimited tier. With some price increases, AT&T's challenge is to convert older unlimited and Unlimited Choice & Plus Enhanced account holders to these new plans with the feature value.

Looking Ahead
In the near term, WatchTV is about enhancing competitive postpaid plan value. It comes at the end of the second quarter and ready for steady promotion going into holiday selling. In the long term, the goal is to increase the video viewer base. To help this, AT&T promises that WatchTV is but the beginning of many new offers to come as the result of the Time Warner acquisition. Given the rapid pace of WatchTV rollout, there should be many of those promise offers should come by the end of the year.

As AT&T has publicly stated, its long term strategy is to leverage its advertising and analytics business unit to drive future revenue. A larger subscriber base certainly helps the cause but that advertising and analytics unit is making its own moves to create the necessary foundation to expand its ad tech expertise. The AppNexus acquisition valued at $1.6B is expected to close in the third quarter brings further global capability, something I believe wants to further expand its international portfolio. CEO Randall Stephenson promised more smaller acquisitions to come after the Time-Warner close. With the impressive pace of announcements and execution, it'll be interesting where the now media company will bolster its business units. My money is on further content and ad tech.

Tuesday, June 19, 2018

As a long time industry analyst and wireless segment observer, I've witness short term/tactical carrier moves in price plans to increase competitiveness, the network technology generations positioning and rollouts and corporate strategic turns. Experiencing this June's AT&T Shape conference in Hollywood validated to me, the ongoing reinvention of a telecom company into a global media company. Of course, that was all set in motion with the 2014 DirecTV acquisition and now with the $85B Time Warner buyout, it's full speed ahead. That has been the big media journey so far. How the company lines up to this important goal is found in internal and external complementary changes. One such change is the creation of the Shape conference.

Rewind back to the time when smartphone adoption was ramping up. Device app development was exploding. The internal AT&T investment to spur innovation through external collaboration created the Foundry concept. AT&T's Palo Alto Foundry launched in 2011 to bring in Silicon Valley minds to work on cool ideas, at the time, app development was the low hanging fruit. In conjunction, the AT&T Developer Summit had already started in early 2010. Always a couple of days ahead of the Consumer Electronics Show opening, the Dev Summit sought to capitalize on the tech CES attendee base. The four day conference designed with speakers, a hackathon, prizes and parties spurred networking among AT&T, partners and developers. As an aside, 2014 was maybe the most infamous due to the party crashing by T-Mobile CEO, John Legere.

Fast forward to the increasing importance of content, mainly video and the influence of DirecTV and more importantly, DirecTV Now (launched in Fall 2016) as content delivery platforms.

With a 6 year run, AT&T ended the Dev Summit. It was time to move into the media and content community. AT&T Shape 2017 (billed as a tech and entertainment expo) conference at Warner Brothers studios nods to AT&T's strategic imperatives of content and its ecosystem. Yet the AT&T network, as in the Dev Summit, was a backbone topic. Though a hackathon with cash prizes was still an event, spotlight shifted to the AT&T Film Awards. With multiple winning categories, including a grand prize of $20,000 in the Best Short: Emerging Filmmakers category, filmmakers were now in the driver's seat. Nevermind that the filmmakers spend much more than the grand prize to create their film, Shape provides a platform to catch the eyes of Hollywood execs, and (now) WarnerMedia, the AT&T content business unit. At this year's Shape, AT&T Mobility & Entertainment President, David Christopher 'called an audible' (impromptu) and declared all three finalists, winners (each winning $20k) in the Best Short: Emerging Filmmakers segment, to the audience's approval. It was a nice move, one that filmmakers in the audience will remember as AT&T largesse.

While tech and content speaker sessions packed interested audiences, the tech demos in the a Warner Brothers town square pushed a lot of 5G technology education and virtual and augmented reality companies. While some of the demos were stretching one's imagination, it's the trajectory towards these VR/AR areas combined with 5G that is undeniable as future growth areas.

Content is king. That has been punctuated with the rapid close of Time -Warner into WarnerMedia. The next step in AT&T's strategy is to further monetize this content beyond the standard distribution and licensing agreements. The four main business units under the AT&T corporate umbrella are Communications, WarnerMedia, International and Advertising & Analytics. AT&T Chairman Stephenson has already spoken bullishly of the smart monetization potential of its burgeoning ad business, especially when the company has owner's economics on content. Stephenson has also stated that there will be smaller ad/adtech acquisitions coming. For Shape 2019, I am betting that this business unit will be more prominent, showing content creators and owners on how they may monetize their assets further.

Friday, June 8, 2018

Verizon announced that current CEO Lowell McAdam will be stepping down effective August 1, 2018 (a Wednesday). Hans Vestburg, former Ericsson CEO, who joined the company in April 2017 as CTO, will become CEO and work with McAdam in the transition.

A couple of points when I read the news:

Surprise - In 18 months, the rapidity of elevating an outsider to the CEO spot seems to be unprecedented at a company that usually promotes from within. I was going to go with John Stratton as he was the logical choice, assuming the internal elevation approach. Yet this is a new world in which the stakes are high for Verizon to execute on its 5G vision along with its big dollar bet on Oath. Broader multi-company knowledge and experience is now expected.

CEO chops - Vestburg has global CEO credentials, over 6 years worth at Ericsson. The Verizon bench also has their pick of former CEOs that have their own narrow expertise - Ronan Dunne (ex-O2 CEO for 9 years and its CFO for 3 years) and Tim Armstrong (ex-AOL CEO for 6 years until Verizon acquire it in 2015). The graphic below, extracted from Verizon's 2017 10K filing, shows likely candidate pool that the Board of Directors may have been considering. The officers with outside background have already been integrated into the officer fold. As an aside, Vestburg's elevation makes sense for Marni Walden's October 2017 departure along with the rumors that she wasn't going to succeed McAdam.

Age - Age is likely a consideration criteria in sucession planning as Vestburg is 52. McAdam took the CEO reins in 2011 at age 57 but had CEO responsibility for the wireless business unit since 2006 at 52 years old. The point here is that he can hang around for at least 5-8 more years.

Technical Background - It's taken for granted that every CEO should have deep business background and experience, but as the telecom and ad company moves into 5G, it should have leadership that understands how the new technology can leverage into successful growth. Vestburg doesn't have McAdam's engineering background yet the lengthy tenure at Ericsson enabled him to slot into the CTO position despite a business degree.

Vestburg's Challenges

Understanding Operations - In the video, Vestburg admits that he needs to delve into the operations and commercial side, the bread and butter wireless and wireline service provider things that bring in over $126B annual revenue. Of course there are the cadre of business unit heads that know their areas who will continue to work their areas.

Vision Delivery - 5G is the hot topic that at times is overhyped but yet mutually agreed across the industry as the future innovation and revenue driver. Vestburg, in the old Ericsson role, pushed that vision across the service provider segment. Now he'll be the focal point to execute and bring in the moolah (technical term) and prove McAdam and the Board of Directors made the right choice. Oath's potential has been talked up a lot along with its global ambitions. In 1Q18, its revenues were $1.9B, compared to $21.9B in wireless and $7.6B in wireless.

Ericsson Baggage - Vestburg departed Ericsson with declining revenue trends. Some of my infrastructure analyst colleagues have already noted with surprised that with such a bad tenure, he'd be able to guide Verizon's future growth.

Turnover - As with every company's transitioning to a new CEO, there may be turnover in the executive pool. Marni Walden left. Will there be others. Moreover, there has been precedence that new executives would elevate or bring in their own people from previous positions. Will that happen and to what extent? Now that the CTO and Stratton slot will be vacant, who will slide into those positions?

UPDATE - No sooner than the digital 'paint' on the Vestberg CEO announcement dry did Verizon announce John Stratton's retirement by the end of the year. With over 25 years with the company, he's sure to get more than a belt buckle or television (inside Bell System joke). The link for the press announcement (hosted on the Investor Relations site) has the obligatory outgoing exec quote.